Food Prices: Mr. Krugman vs. the Evidence

Why? Because Paul Krugman has just put the blame on… well, not Quantitative Easing or the Fed, not on speculation by commodity traders, in fact not on any human cause whatsoever. But on weather… and moreover, climate change. One wonders how climate change might cause a 100% spike in food prices in one year. Nonetheless, Mr Krugman derides those who might see Adam Smith’s “invisible hand” of the financial market at work causing a spike in prices as an outcome of what Smith would have called “selfish interests” of the Fed or commodity traders. Mr. Krugman writes,

While weather is not a wholly irrational explanation at first blush (climate change is), the data do not however support such conclusion.

To review the evidence already presented on this question days before Mr. Krugman entered the fray: on Feb 1 we noted the skyrocketing food prices in Egypt (due greatly to speculation and Fed policies) contributing to the uprising there. The following graphic illustrated the severity of the issue:

On Feb 5 we discussed worldwide boom in food prices, and provided evidence of Fed monetary easing influence on this rise:

Finally, on Feb. 6, we find Mr. Krugman opining that “huge increases in the prices of wheat, corn, sugar and oils” and food in general is primarily due to weather. He then examines only wheat, noting wheat production dropped this year, to explain away all food price increases of all commodities.

True, a five percent drop in wheat production may raise wheat prices if supplies are insufficient. But according to the FAO, wheat stocks are not in any jeopardy of running out:

“Although global production in 2010 is set to decline by at least 5 percent from 2009, wheat stocks have proven sufficient to cover this year’s decline in world output, especially in major exporting countries.”

And the problem with the ‘weather theory’ of food prices is that major food staples are up in price across the board regardless of their supply, scarce or plentiful – just as they were during the last worldwide bout of spiking food prices in 2008.

Below is a sampling of major supplies and commodities composed from the FAO, USDA and commodity exchanges, then graphed by the author. Note how the only product that could possibly be affected by supply is wheat… which Mr. Krugman just happens to choose to explain all commodity prices:

It appears that commodity prices have a mind of their own, defying convenient but ultimately specious explanations. Rather prices follow the laws of the market – a market hoarded, swindled or otherwise manipulated – but a market following it’s own laws just the same. Could it be that President Sarkozy, that ranting Frenchman who blames “extortion and pillaging”, could perhaps “avoir raison”?